When powerful forces collide head-on at the intersection of politics and economics, the crash is bound to be loud and unsettling.
Consider the current rift between the United States and China over China's currency, the yuan. The Bush administration is publicly pressuring China to allow the yuan to rise against the dollar to stave off protectionist legislation in the U.S. Senate. Some lawmakers, responding to concerns on the part of manufacturers and labor unions, assert that cheap Chinese exports -- made even cheaper by a yuan whose exchange rate, they say, is too low in relation to the dollar -- give Chinese firms unfair advantage over American companies and is a major contributor to the U.S. trade deficit and current-account deficit. In response, Chinese officials, who have kept the yuan fixed at 8.28 to the dollar since 1994, have said firmly that they will not be coerced into taking action by a foreign government seeking to meddle in a matter of national sovereignty.
Faculty members at Wharton and other China-watchers predict that China will eventually revalue the yuan, probably this year, because it is in China's own long-term interest to do so. But the United States, by trying to force the issue in such a vociferous, public manner, is unnecessarily antagonizing the Chinese and possibly delaying the revaluation, according to these experts. They say that the application of pressure by the United States is a political move designed to assuage interests adversely affected by competition from China. They add that revaluing the yuan will not revitalize industries that have been battered by a longstanding and irreversible trend of certain jobs moving to China, where labor and production costs are cheap.
"The Chinese are very proud and they are most likely to revalue when we don't expect it," says finance professor Richard Marston, director of the Weiss Center for International Financial Research at Wharton.
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